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Toll Roads and Bridges For Sale

In early December, the City of Chicago raised sorely needed cash — roughly $1.83 billion — by leasing most of its parking meters to a consortium of three infrastructure funds for 75 years.

City, county and state governments are hurting for revenue. States alone face a $97 billion budget gap in the next two years. Across the country, local governments have laid off thousands of employees and sought creative ways to make up for budget shortfalls. As the primary owners of infrastructure, they are expected to market further offerings. And investors are showing a healthy appetite for these assets.

Investors recently bought the Indiana Toll Road for $3.8 billion, and bid $12.8 billion for the Pennsylvania Turnpike, though that deal stalled. A few years ago, Chicago unloaded a toll bridge and now is selling Midway Airport. Texas may sell some of its toll roads.

An October survey of 218 senior investment executives at pension funds, fund of funds, insurance companies and foundations projects that $94 billion in infrastructure funds will be marketed globally within a year. The survey was conducted by San Francisco-based equity placement agency Probitas Partners.

The sector raised an estimated $21.5 billion in the first nine months of 2008, Probitas estimates. While the annual figure will likely be less than the $34.3 billion raised in 2007, it has already surpassed the $17.9 billion total for 2006.

The recession hasn't dampened investor interest. Probitas counts 63 infrastructure funds worldwide, and more than half target deals over $1 billion. Among the largest current or planned new funds are Goldman Sachs Infrastructure Partners II ($7.5 billion) and Macquarie European Infrastructure Fund III (€5 billion).

But smaller funds are getting in on the action too, says Seth Goldblum, managing director of Philadelphia-based financial consultancy CMF Associates LLC.

“The big deals, the roads and bridges, get most of the attention, but there are smaller infrastructure niches as well,” says Goldblum. Many of the funds he advises are buying wastewater treatment facilities for $25 million to $50 million.

In a tough economy, infrastructure returns are drawing investor attention. “Investors are recognizing infrastructure as a real estate-like investment, with physical assets that offer risk-adjusted returns that can be predicted with reasonable accuracy,” says Stuart Eisenberg, partner and managing director of real estate and hospitality services at New York-based BDO Seidman LLC.

The majority of investors expect annual returns of 10% to 12% from infrastructure, Probitas reports. A steady but lower return — perhaps up to 10% — might be a wastewater treatment facility serving a mid-sized town or a toll road that doesn't need major improvements, says Eisenberg. Adding a new exit on a toll road poses higher risks and can offer higher returns, to the upper teens.

While the Obama Administration has promised a massive stimulus package focusing on infrastructure, the effect on the market for privatizing infrastructure isn't yet known, says Eisenberg. “But it certainly will put a spotlight on infrastructure, which could pique investor interest even further.”

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